What makes capital gains tax so complicated and how to simplify it There is a proposal to standardize taxation by applying a single 10% tax rate on long-term capital gains for all financial assets
Income tax rules on capital gains are complex, with different holding periods and tax rates for different assets. The length of time an asset is held by a taxpayer determines if the gains are considered long-term (LTCG) or short-term (STCG), affecting how they are taxed.#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} For LTCG, the holding period also influences if indexation benefits apply. Indexation allows adjusting purchase price for inflation, thereby lowering the tax.
The current system is marked by a patchwork of holding periods and tax rates tailored to specific asset types. The above list (see table) is only illustrative, and the capital gains tax rules must be carefully reviewed for each asset type. The complexities increase further with the availability of indexation benefit on LTCG for certain class of assets (e.g. land and building), and not for certain other assets (e.g. listed shares). The capital gains tax provisions for certain assets vary between resident and non-resident taxpayers too.
One simplification could be to standardise taxation for all asset classes. For example, a single 10% tax rate on LTCG could be applied to all financial assets, such as equity shares, preference shares, and mutual funds, with a uniform holding period of over 12 months to qualify as LTCG. Similarly, a consistent holding period of more than 24 months could be established for all non-financial assets.
There are some other provisions that need a relook. For instance, the law stipulates that share transfers by a shareholder in a merging company are not considered transfers, provided certain conditions are met. This exemption is only granted when shares are held as an investment. If shares are held as stock-in-trade, the profits from their sale are taxed as business income, and the exemption does not apply. This distinction should be eliminated, extending the exemption to shares held as stock-in-trade.
(The writer is tax director, EY India; Views expressed are personal)
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This story originally appeared on: India Times - Author:Faqs of Insurances
